Tag Archive for Roth IRA

Have you saved for 2016?

April 15th looms and for those of you who haven’t saved for 2016, time is running out. As if that pressure isn’t enough, you have to decide what kind of retirement account to use.

Roth IRA

Roth IRAs allow you to put up to $5,500/year in ($6,500 if you are 50 or over). The money you put in has no tax write off today, but the growth is tax free when you withdraw at retirement. You need to have the money in the account for a minimum of 5 years or until age 59 ½, whichever is longer in order to access the growth tax and penalty free.

Money you contribute to a Roth can be accessed at any time with no taxes or penalties. So, if you put $10,000 in a Roth IRA and the account is worth $20,000, you can withdraw the first $10,000 without taxes or penalties regardless of your age.

Not everyone can contribute to a Roth IRA. Like any benefit the IRS gives, there are income limits on who gets to enjoy them. The income limits start at $117,000/year for single folks and go up to $187,000/year for married couples in 2016. (Click here for more details.)

Traditional IRA

Traditional IRAs are the original players in the retirement account game. The money you contribute (same limits as above) can be deducted from your income taxes as long as you don’t have access to a workplace retirement plan and fall under IRS income limits. (Visit the the IRS website for the income limitations.)

Growth in the Traditional IRA does not generate a current tax bill, but you will pay taxes at your regular income tax rate when you withdraw the money at retirement.

Which is best?

It’s hard to say because we don’t know what your tax rate in retirement will be compared to now. If you know you tax rate is higher now than in retirement, go for the tax-deferred option. If you suspect you will have same or tax rates in general will be higher in your retirement, you might like the Roth better.

Since we don’t know future tax rates any more than future investment returns, it’s a good idea to have a mix of both Traditional and Roth retirement accounts. That way, you are ready for anything!

Second in a 2-Part Series

In part one you have madly scrambled to increase your retirement plan savings and sign up for your Flexible Spending Account during the last milliseconds of open enrollment. Now, let’s talk about the other 3 items on the list.

#3 Harvest Tax Losses

In your non-retirement (a.k.a. taxable) accounts, you report and pay taxes on dividends and capital gains each year. If you sell an investment for a loss, you can write off that loss on your taxes each year. The maximum loss is $3,000/year.

If you have a gain in one investment and a loss in another, you can offset the gain by selling both the gainer and the loser. There is no limit to the amount of gain that can be offset by a loss.

You must sell your investments for gains/losses by December 31, 2014 in order it to count on this year’s taxes. Wash Sale Rule: If you sell an investment for a loss and re-buy that same investment within 30 days, you cannot take the write off for the loss on your taxes.

Example: Joe and Jane own 2 investment in their joint account.

Mutual fund ABC has gained $2,000 since they bought it

Mutual fund XYZ has lost $1,000 since they bought it.

Joe and Jane can sell both funds, but only report a $1,000 gain on their taxes, since the $1,000 loss in XYZ offsets $1,000 worth of the gain of ABC.

Or, they could sell just enough of ABC to realize $1,000 loss that could be offset by selling XYZ.

They can buy back both funds 31 days or more after selling to avoid the Wash Sale Rule

#4 Give to Charity

This is a great time of year to reflect on all that you are grateful for in your life and give to those who aren’t as lucky. Most people don’t give to charity because there is a tax benefit, but it would be foolish not to take advantage of government incentives that are out there. Some things to be aware of:

Contributions to qualified charity made on or before December 31, 2014 can be used to reduce your 2014 income taxes.

Keep receipts for contributions of $250 or over (i.e. donations to Goodwill).

Cash donations can be written off to a maximum of 50% of your Adjusted Gross Income.

Donations of securities (stocks, bonds, mutual funds) can be deducted to a maximum of 30% of Adjusted Gross Income.

By donating securities that have gone up in value, you avoid paying capital gains when selling those securities.

People who are over 70 ½ can donate up to $100,000/year to a charity directly from their IRAs and have the donation count toward their Minimum Required Distribution.

If you plan to donate securities to a charity, start the process AT LEAST 7 business days before December 31st. These transfers do not happen by magic. There is paperwork, often notarized signatures are required, and the transfers take time. The donation must be RECEIVED by December 31st to count for that year’s taxes.

#5 Consider a Roth Conversion

A Roth Conversion means to transfer money from a tax-deferred IRA to a Roth IRA.

You owe income taxes on the amount you convert in the year you do the transfer.

The balance then grows tax-fee and costs nothing in taxes to withdraw in retirement.

If you are in a lower-than-usual tax bracket this year and expect to earn more in subsequent years, this could be a good time to pay less taxes on a Roth Conversion.

OK, enough financial lecturing. Get out there and stimulate the economy by buying things for relatives that they don’t need or want. All while respecting your budget, of course!

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When anyone is talking to you about investment ideas, the question you need to be asking is simple:What’s in it for me?

In the case of deciding what kind of IRA to use, you want to know what benefits are there for using a Roth vs. the old Traditional.This week, we discuss the first of the top 2 reasons people choose a Roth IRA:Tax-free withdrawals in retirement.

Brainy advisers will try to tell you to figure how much your tax rate is now vs. how much you think your tax rate will be in retirement.If you think the now tax rate is higher than the retirement tax rate, you should NOT use a Roth IRA – so goes the conventional wisdom.

I say differently.In retirement, taxes become a bill that you have to pay along with food, utilities and medicine.Every time a you take money from a Traditional IRA, 401(k), 403(b), SEP IRA, or other tax-deferred account, you generate a tax bill.Ugh!

Having a Roth IRA means there is one glorious account from which a retiree can take money and not have a tax bill on the withdrawal.As that retiree, you are not going to be doing the math of whether or not you paid more taxes in your working years to get that pool of money.You’ll just be glad to have it.

I tell people that having a Roth IRA in retirement is like having life insurance at your spouse’s death.No one ever said there was too much life insurance money and regretted the premiums when it came time to collect.And I’ve never seen a retiree regret his Roth IRA pool of money.

Next week, we talk about reason #2 to use Roth IRAs – passing along income tax-free assets to your heirs.

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DISCLOSURE: The information on this website is for general informational purposes only and is subject to change. This website does not represent a solicitation or offer to buy or sell securities. Further, it does not represent an offer to provide investment advisory services in states where I have not filed notice or where I do not have an exemption or exclusion from filing notice. Although the information on this site is gathered from sources assumed to be reliable, Sullivan Financial Planning, LLC, is not responsible for the accuracy of content on linked websites or in articles provided. Past performance of investments is not a guarantee of future results.